Taste Holdings reports an annual loss of R317.6m ($21.6m) but plans more store opening for its Starbucks and Domino’s Pizza franchises. Its turnaround plan includes opening six new Starbucks and 10 Domino’s Pizza outlets through to 2020, and eventually targeting 150-200 stores.
In January Taste Holdings looked like it would abandon its Starbucks coffee franchise in South Africa. Starbucks entered South Africa in April 2016, and at the time Taste Holdings had plans to open 45 stores by 2020, with a target of 150 nationally. It currently has 12 outlets in South Africa and has consistently struggled to compete with a number of larger domestic rivals such as Mugg & Bean and The Seattle Coffee Company.
What has changed? At the end of January 2019, Taste Holdings completed a successful R132m rights offer to fund expansion. In March 2019, the company appointed a new CEO, Dylan Pienaar, to deliver a turnaround. At least R40m ($2.72m) of the rights offer will be used for the Starbucks expansion.
Of the six new Starbucks stores, two will be in KwaZulu-Natal. The store at the Gateway Theatre of Shopping in Umhlanga, north of Durban, is the company’s best performing Starbucks outlet. Taste Holdings anticipates launching 6-10 new Starbucks every year after 2020. It has also estimated that it needs at least R700m ($47.6m) to have positive cash flow, and that the Starbucks store network would need to be between 150-200 stores, and Domino’s Pizza between 220-280 stores.
It’s an ambitious goal, but light on detail about how Taste Holdings will deliver this Starbucks growth strategy, given that it will effectively need to take significant market share from one or all of three much larger chains. We think that the most effective strategy is acquisition, not organic growth. To put this in context, the #3 coffee chain in South Africa, Vida e Caffè, has 74 stores. At the rate of 10 new stores a year, Starbucks would still only be the #4 coffee shop chain in South Africa in 2026 if nothing else changed.
The issue for Taste Holdings and Starbucks is that the South African market is highly developed. Trendtype tracks 269 fast chains in South Africa and 33 coffee shop chains alone. There is already a successful US style chain in The Seattle Coffee Company, which was set up as a Starbucks-alike chain (in 1998 the UK network was sold to become Starbucks in the UK). South African chains already compete on a cut throat basis with one another. The challenge is that Taste Holdings has to account in its operating model for significant franchise fees. In order to do that it either has to sacrifice margin, go premium or outperform the competition operationally.
We don’t think Taste Holdings can sacrifice margin or outperform established rivals. Other chains have achieved this: Of those options, going premium is the best bet. Both KFC and McDonald’s have been extremely successful in South Africa while being more expensive than domestic competitors. We still think it’s a big ask of South African consumers, whose budgets are already being squeezed, to opt for a more expensive coffee shop chain. The main issue, however, is that the Starbucks proposition doesn’t seem to resonate with South African consumers. Whatever else happens, that has to change for Taste Holdings to be successful.
